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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Zero-coupon Security and STRIP

Definition

A zero-coupon security is a bond that makes no interest payments, paying the investor only the face value at redemption.

A bond STRIP is a zero-coupon bond created by separating each coupon payment and principal payment due from a coupon-bearing bond and allowing each cashflow to be traded as a separate zero-coupon bond.

How are they used?

Zero-coupon security

Many projects require up-front funding, but are unlikely to give rise to an income stream to service interest costs for some period of time, such as a major building project, in which substantial cash outlays would be needed for construction, whilst income from either rentals or the sale of the building would be received much later. Zero-coupon ...

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